IMF piles pressure on Germany to help struggling eurozone banks directly
Christine Lagarde urges eurozone leaders to ease 'acute stress' on euro as Moody's downgrades 15 of world's biggest banks.
The head of the International Monetary Fund has piled pressure on Germany by recommending a series of crisis-fighting measures that chancellor Angela Merkel has resisted.
IMF managing director Christine Lagarde warned that the euro is under "acute stress" and urged eurozone leaders to channel aid directly to struggling banks rather than via governments. She also called on the European Central Bank (ECB) to cut interest rates.
Her comments came as Italy's prime minister, Mario Monti, warned of the apocalyptic consequences if next week's summit of EU leaders were to fail.
The stark message from Lagarde, delivered to eurozone finance ministers who were meeting in Luxembourg, will increase pressure to come up with a unified approach to tackle problems including Spain's struggling banks. She urged the 17 eurozone countries to consider jointly issuing debt and helping troubled banks directly. She also suggested relaxing the strict austerity conditions imposed on countries that have received bailouts.
"We are clearly seeing additional tension and acute stress applying to both banks and sovereigns in the euro area," Lagarde said after the meeting.
"A determined and forceful move towards complete European monetary union should be reaffirmed in order to restore faith," she said. "At the moment, the viability of the European monetary system is questioned."
Asked what Germany would think of her suggestions, she smiled and said: "We hope wisdom will prevail."
At lunchtime, Merkel will meet Monti and the leaders of France and Spain in Rome in an effort to forge a common strategy to save the euro. Some, Merkel included, consider the survival of the single currency essential to preserving the EU itself.
"It will be interesting to be a fly on the wall given that Mr Monti is fast losing support in Italy, due to the speed of his reform programme which is causing mutterings of discontent from all sides," said Michael Hewson, senior market analyst at CMC Markets UK. "In any case, the German chancellor's room for manoeuvre is limited, given the questionable legality of any form of debt mutualisation under German law, and voter discontent at home."
Spain could make a formal request for financial assistance to bail out its teetering banks as soon as Friday. On Thursday, independent auditors concluded that Spanish banks would need up to €62bn (£49.8bn) to protect themselves from financial shocks. That is far below the offer of €100bn of banking aid Spain has received from the EU.
At the start of next week, officials from the IMF, the EU and the ECB will arrive in Athens to begin a review of Greece's progress in reforming its budget. Some European officials have indicated that the harsh austerity measures that have sent Greece's economy into a rapid downward spiral could be loosened.
One of Lagarde's recommendations for Europe was that eurozone leaders should consider issuing bonds or debt "in some form" backed by the governments of all member countries. Berlin opposes the idea because it would put German taxpayers on the hook for foreign debts and increase the country's cost of borrowing.
In addition, Lagarde said it was necessary to break "the negative feedback loop" that occurs when governments take on more debt to bail out their banks, and she called on Europe's two emergency bailout funds to shore up shaky banks directly.